Elements missing from Merkel's vision of Europe

OPINION:IF IRISH voters approve the European fiscal treaty in the referendum on May 31st it will no doubt set off a heated debate as to the reasons for that vote. But it appears already that there are two sets of reasons for which Irish voters might vote Yes to the treaty – each with different implications for the future of Europe and for Ireland’s place in it.

First, out of fear – a fear based largely on the consequences of a No vote.

Most narrowly, this is based on worries that Ireland might not have access to further external funding if needed after the current funding programme runs out in 2013.

More broadly, the peripheral countries fear that the fiscal compact will leave them isolated as the healthier economies in Europe insulate themselves from the difficulties across the euro zone as a whole.

These fears won’t trouble Europe’s elites too much if Ireland delivers a Yes vote and the fiscal treaty marches on. But they should.

Support for the European project is declining rapidly in the very countries that were once Europe’s greatest backers. Eurobarometer surveys show that the percentage of people in Ireland, Italy, Portugal and Spain who “tend to trust the EU” fell from 57 per cent before the crisis in April 2008 to 42 per cent in May 2011.

This collapse in institutional legitimacy extends not only to the ECB but to the previously popular commission and even parliament. A damaging split is opening between the periphery and even the smaller countries of the core.

This should certainly trouble German chancellor Angela Merkel who, in recent speeches, has argued that the fiscal treaty is a strongly pro-European response to the crisis that will rebuild trust in finances and between governments, and will require greater strengthening of the centre in Europe and deeper political union.

Her speeches echo in arguments that the treaty will be a “gateway”, a platform from which policymakers can undertake future efforts to rebuild the European economy. She calls, therefore, for a second kind of Yes vote – a vote for the treaty as the foundation stone for rebuilding Europe.

Indeed, Merkel can make a strong case that fiscal discipline has been a central plank of the European model in the past. However, in these continental and Nordic economies, fiscal discipline was only one part of a broader social and economic compact. A crucial element in the success of those economies was high rates of investment in technology, research and other productive assets.

This was combined with workplaces that emphasised worker participation, ingenuity and empowerment. Together these are the fundamentals of German exporting success.

Furthermore, all this was held together by the best systems of social protection in Europe. In the European model at its most successful, fiscal discipline was part of a mutually reinforcing package of measures that locked together fiscal, economic and social compacts.

These additional elements are missing from Merkel’s vision of a post-crisis Europe. The banking and financial architecture is designed for greater prudence but hardly to lead the necessary productive investment.

Public investment has stalled or contracted. Bailout programmes have emphasised competitiveness through cost-cutting and weakening social protections, rather than through industrial upgrading and worker involvement.

Ireland’s experience of decline in all these key areas is all the evidence we might need that the European strategy is at present disastrously incomplete.

European institutions could play a critical role here. The European Investment Bank and the structural funds could be mobilised in promoting an investment-led recovery. Policy decisions that could provide national governments with fiscal space to generate economic recovery, including rescheduling debt repayments, are largely ignored. The trillion euro or so in liquidity provided to banks comes with few strings attached in terms of the banks’ role in recovery.

Cross-national investments in vital infrastructure for the knowledge economy could be encouraged further. Institutional changes in terms of financial regulation, promotion of active labour market policies and industrial upgrading could be advanced.

European economies do have a distinctive approach based on a mix of fiscal and monetary caution and substantial, collective investments. Little wonder their leaders tire of lectures from the UK and US where looser fiscal and monetary policy combines with more individualised, speculative real economies. But if they don’t undertake the full package of measures that were at the heart of the European model then they simply prove those critics right.

The European model provided social and economic measures that were counterweights to fiscal discipline – providing short-term stimulus, medium-term productive investment and long-term credible collective commitments to social and economic security.

In the absence of these measures, the fiscal treaty simply institutionalises austerity – in practice and, arguably, even by rule.

If the European project is to be rebuilt the case must be made in both core and periphery for a broader project of reconstruction.

The prospect of a fiscal compact may provide enough stability in banking, bond and stock markets, and in the euro zone economy to avoid a disastrous short-term meltdown.

Soon, however, the European approach will need to go well beyond the fiscal compact to generate growth, employment and become a motor of recovery in the world economy.

This will require European governments and institutions to rediscover their historical taste for constructive politics and building European solidarity – fiscal compacts based on rules cannot substitute for political construction of social compacts.

If this treaty is to be a gateway to the future Europe’s elites will need to put some of the building blocks in place for the road ahead.